Should Clients Cover Their Own Negative Balance?
Our article "Are You Covered? These Brokers Forgive Negative Balance following CHF Crisis" made our guest blogger Ron de Luca
This article is written by Ron De Luca who is a senior risk analyst at Mercer Capital Ltd., a NZ regulated forex brokerage.
Join the iFX EXPO Asia and discover your gateway to the Asian Markets
Since the Swiss Franc crisis shook the global currency market, many brokers either became insolvent (Alpari) or are well on their way to becoming insolvent (FXCM). There is now a debate amongst brokers about whether or not traders should be responsible for negative account balances. This article will address why I believe the traders should never be responsible for negative balance reimbursement.
One of the main causes of this issue are the risky margin call level settings that many reputable brokers offer to traders. These levels are typically below what should be considered safe from a proper risk management perspective. The reason is there are many scam brokers in the market offering too-good-to-be-true trading conditions. The reputable brokers then need to compete by offering unrealistic terms to new clients.
Because the brokers allow traders to use almost all of their equity before being stopped 
out, there’s not enough padding at a margin call to properly exit a trade in extreme market movements. Therefore, the investor’s account hits a minus because there’s no one in the market to take the other side of the trade.
Suggested articles
Going Past the Great Wall: Things to Consider When Entering the Asian MarketGo to article >>
The question then arises: Should the client be responsible for the negative balance? The answer is simply “no” for the following reasons.
1. The client chose to invest a specific amount of money. When the investment was made, the investor did not request a loan from the broker in the case of the account going into negative. The investment is the maximum amount of money the trader is willing to lose.
2. Just as investors need to manage their own risk parameters when investing, so do forex brokers. They have full teams devoted to managing company risk. If the margin call settings are too risky, client accounts can dip into the negative.
It’s important to find a reputable broker with realistic trading terms. This allows the trader to have a fair opportunity to profit and the broker can minimize their risk.
This article is part of the Forex Magnates Community project. If you wish to become a guest contributor, please get in touch with our Community Manager and UGC Editor Leah Grantz leahg@forexmagnates.com
Absolutely agree! Stop losses could not be filled in this rare scenario. All debts should be forgiven as some brokers are doing and lets get back to business!
Absolutely agree! Stop losses could not be filled in this rare scenario. All debts should be forgiven as some brokers are doing and lets get back to business!
I am one of the traders with negative balance with IG index. I agree with the statements above. I would also add , in terms of spread bet . I BET on spread. I should not be accountable for inability of broker to close their physical contacts with third parties. When placing the bet IG request specific amount of money per point to fulfil their margin requirements. This include position cover + 20 points below SL (in my particular case) for potential gaps/slippage. As pointed in text I have never agreed to credit my account with any amount of money… Read more »
Hi Andy,
speaking to Forex Magnates reporters, CME Europe’s Executive Director and Head of Strategic Sales Felix Carabello, has confirmed that the exchange will be launching its FX business on Sunday as the final regulatory approval has been obtained.
Hi Andy,
speaking to Forex Magnates reporters, CME Europe’s Executive Director and Head of Strategic Sales Felix Carabello, has confirmed that the exchange will be launching its FX business on Sunday as the final regulatory approval has been obtained.
I am one of the traders with negative balance with IG index. I agree with the statements above. I would also add , in terms of spread bet . I BET on spread. I should not be accountable for inability of broker to close their physical contacts with third parties. When placing the bet IG request specific amount of money per point to fulfil their margin requirements. This include position cover + 20 points below SL (in my particular case) for potential gaps/slippage. As pointed in text I have never agreed to credit my account with any amount of money… Read more »
I agree that brokers should cover client negative balances. But I disagree with your arguments. Margin trading is called margin trading for a reason. The customer took a look on hope of betting for a higher return and now they can’t pay it back. To simply state the “The client chose to invest a specific amount of money. When the investment was made, the investor did not request a loan from the broker in the case of the account going into negative” is incorrect since the did in fact take a loan in the form of margin.
I agree that brokers should cover client negative balances. But I disagree with your arguments. Margin trading is called margin trading for a reason. The customer took a look on hope of betting for a higher return and now they can’t pay it back. To simply state the “The client chose to invest a specific amount of money. When the investment was made, the investor did not request a loan from the broker in the case of the account going into negative” is incorrect since the did in fact take a loan in the form of margin.
B-book brokers can agree with this. After-all, that’s the least they can do for taking all of your deposit. They didn’t actually lose anything. True A-book brokers could not possibly cover losses and it would specify in their terms and conditions that the trader may lose more than all of their deposits and they would be responsible to repay any losses that result in negative balance due to their own trading decisions.
A hybrid A/B broker could cover losses out of good faith, but might not ‘guarantee’ against losses.
B-book brokers can agree with this. After-all, that’s the least they can do for taking all of your deposit. They didn’t actually lose anything. True A-book brokers could not possibly cover losses and it would specify in their terms and conditions that the trader may lose more than all of their deposits and they would be responsible to repay any losses that result in negative balance due to their own trading decisions.
A hybrid A/B broker could cover losses out of good faith, but might not ‘guarantee’ against losses.
You wrote … “The reputable brokers then need to compete by offering unrealistic terms to new clients.”
So when does a reputable broker become a non-reputable broker? The good guys need to become the bad guys to survive? Doesn’t sound sustainable.
You wrote … “The reputable brokers then need to compete by offering unrealistic terms to new clients.”
So when does a reputable broker become a non-reputable broker? The good guys need to become the bad guys to survive? Doesn’t sound sustainable.
I disagree with the argumentation as well as it totally missunderstands the concept of CFDs or spreadbetting. All of the customers could have gone to their bank branches and could have bought physical Swiss Franc to sell them later in a successfull long scenario. They did not do it because they wanted to trade with a leverage. That means that your risiko is as high as your whole equivalent Swiss Franc position in case something goes horribly wrong. For that matter with IG for example they offer guaranteed stops that exactly does what is requested. It caps the losses of… Read more »
I disagree with the argumentation as well as it totally missunderstands the concept of CFDs or spreadbetting. All of the customers could have gone to their bank branches and could have bought physical Swiss Franc to sell them later in a successfull long scenario. They did not do it because they wanted to trade with a leverage. That means that your risiko is as high as your whole equivalent Swiss Franc position in case something goes horribly wrong. For that matter with IG for example they offer guaranteed stops that exactly does what is requested. It caps the losses of… Read more »
You got the base all wrong.
1) the stop out is not to protect the trader, is a broker order to protect theirselves for you going out of margin.
2)yes, if you invest more than you have in the account you are asking for a loan. Thats leverage, you want to leverage? Take this loan. The trader is the one that place the order and the amount, dont want a loan? Do not trde an amount bigger than your account
You got the base all wrong.
1) the stop out is not to protect the trader, is a broker order to protect theirselves for you going out of margin.
2)yes, if you invest more than you have in the account you are asking for a loan. Thats leverage, you want to leverage? Take this loan. The trader is the one that place the order and the amount, dont want a loan? Do not trde an amount bigger than your account
Try searching through the website of the RIA Novosti agency, they cited a report by Russian newspaper “Ъ”.
Try searching through the website of the RIA Novosti agency, they cited a report by Russian newspaper “Ъ”.
All these negative balance protections should be banned by the regulators, because it’s rigging the market structure, and create moral hazard. This is creating the belief that once you have bought something on leverage, there will be a “known” market and liquidity for you to sell into later… That’s just unrealistic and counter productive, creating huge future risks. Problem is, people would like to make the risk of ruin go away when it’s a cornerstone of speculation AND capitalism. Why do you think regulators keeps banging on the “highly speculative” and “you can lose more than your money invested”… The… Read more »
All these negative balance protections should be banned by the regulators, because it’s rigging the market structure, and create moral hazard. This is creating the belief that once you have bought something on leverage, there will be a “known” market and liquidity for you to sell into later… That’s just unrealistic and counter productive, creating huge future risks. Problem is, people would like to make the risk of ruin go away when it’s a cornerstone of speculation AND capitalism. Why do you think regulators keeps banging on the “highly speculative” and “you can lose more than your money invested”… The… Read more »
If a trader has a really great day and ends up with a big profit, they expect the broker to cover that, surely? So if the market goes against them how is that the broker’s fault? Why should the broker not expect the trader to cover the loss?
If a trader has a really great day and ends up with a big profit, they expect the broker to cover that, surely? So if the market goes against them how is that the broker’s fault? Why should the broker not expect the trader to cover the loss?
Retail clients require further protection. Brokers cant assume by reading tc that they all understand the actual risk. How many tc are explicitly clear that they can be faced with unlimited losses. I dont recall there being risk warnings on ig mobile app. Have they really treated customers fairly by allowing them to get into negative balances … some many times greater than what they actually are worth?!
If ig didnt have guarantee stop in eurchf. Because they didnt want to take the risk. Then why would their clients?!. Theyve blindly let them believe those stops around 1.20 were realistic.
Retail clients require further protection. Brokers cant assume by reading tc that they all understand the actual risk. How many tc are explicitly clear that they can be faced with unlimited losses. I dont recall there being risk warnings on ig mobile app. Have they really treated customers fairly by allowing them to get into negative balances … some many times greater than what they actually are worth?!
If ig didnt have guarantee stop in eurchf. Because they didnt want to take the risk. Then why would their clients?!. Theyve blindly let them believe those stops around 1.20 were realistic.
@stuart, Well said. a reputable broker does not have to compete with scam artists. A reputable broker attempts to educate their clients on what actually occurs when they arrange trades for their clients. They can offer transparency, which trumps ‘due diligence’ on any day. The majority of reputable brokers are still standing today, and will improve their risk models even more. @Paul, You are correct, but the problem is that some of these brokers either overtly or implied that they would cover negative balances. By allowing traders to trade off of margin, they essentially offer unsecured loans to these traders.… Read more »
@stuart, Well said. a reputable broker does not have to compete with scam artists. A reputable broker attempts to educate their clients on what actually occurs when they arrange trades for their clients. They can offer transparency, which trumps ‘due diligence’ on any day. The majority of reputable brokers are still standing today, and will improve their risk models even more. @Paul, You are correct, but the problem is that some of these brokers either overtly or implied that they would cover negative balances. By allowing traders to trade off of margin, they essentially offer unsecured loans to these traders.… Read more »
Each broker can make their own policies regarding debt balances and follow them. You can’t say one thing to your clients and do another. It’s that simple. I am not sure what FXCM will do but their no debit policies that helped them gain market share are on multiple areas of their site and a topic of many threads and articles. I hope they keep to their policy and not chase retail traders that have gone negative. That would make them deceptive, fraudulent and open themselves to more legal problems. The shareholders and clients deserve that they fix their problems… Read more »
Each broker can make their own policies regarding debt balances and follow them. You can’t say one thing to your clients and do another. It’s that simple. I am not sure what FXCM will do but their no debit policies that helped them gain market share are on multiple areas of their site and a topic of many threads and articles. I hope they keep to their policy and not chase retail traders that have gone negative. That would make them deceptive, fraudulent and open themselves to more legal problems. The shareholders and clients deserve that they fix their problems… Read more »
Yeah! And apply this to any futures, forward, options (when shorting call), swaps and any margin trading…
I also suggest to limit individual investors from any losses when trading shares or even bonds because they didnt expect to lose as much…
Shocked to read anything like this from market professional…
Yeah! And apply this to any futures, forward, options (when shorting call), swaps and any margin trading…
I also suggest to limit individual investors from any losses when trading shares or even bonds because they didnt expect to lose as much…
Shocked to read anything like this from market professional…
Anyone heard anything from IG yet?
Anyone heard anything from IG yet?
I also do believe that the broker (e.g. IG) should have a better risk management. In this case, it did not work. This whole action plan of some Brokers (trying to get the negative balance) is bad for the whole “financial industry”. The people are losing their trust.
To “let go” is the only good thing to do (to my mind).
I also do believe that the broker (e.g. IG) should have a better risk management. In this case, it did not work. This whole action plan of some Brokers (trying to get the negative balance) is bad for the whole “financial industry”. The people are losing their trust.
To “let go” is the only good thing to do (to my mind).
So rumours around Fxcm wiping negative balances. ig index not so focused on clients then? Actually add CMC and Saxo to the list of bad guys
So rumours around Fxcm wiping negative balances. ig index not so focused on clients then? Actually add CMC and Saxo to the list of bad guys
Ig still chasing for funds. Received formal rejection on friday and now private calls today to review finances.
We all want to know. Will IG clear negative funds.
Ig still chasing for funds. Received formal rejection on friday and now private calls today to review finances.
We all want to know. Will IG clear negative funds.
All the disclaimers I see for my forex accounts always stress that it is possible to lose more money than one deposits due to the risk of sudden moves in the markets. Is this not exactly what happened in this case? I have no problem with the idea of clients needing to cover their negative balances. This isn’t to say that brokers couldn’t have done some things differently. I also can’t understand why people are upset with the SNB. The SNB and swiss monetary policy doesn’t exist for the benefit of currency speculators. If the SNB had announced that they… Read more »
All the disclaimers I see for my forex accounts always stress that it is possible to lose more money than one deposits due to the risk of sudden moves in the markets. Is this not exactly what happened in this case? I have no problem with the idea of clients needing to cover their negative balances. This isn’t to say that brokers couldn’t have done some things differently. I also can’t understand why people are upset with the SNB. The SNB and swiss monetary policy doesn’t exist for the benefit of currency speculators. If the SNB had announced that they… Read more »
@FXGai,
1) FXCM is a good example of a large, regulated broker who repeatedly said that traders who open an account with them were limited to their deposits.
2) SNB can do whatever they want. They just lied, that’s all. This makes them untrustworthy for future announcements. Particularly ones where they say they will defend their policy with ‘upmost determination’
@FXGai,
1) FXCM is a good example of a large, regulated broker who repeatedly said that traders who open an account with them were limited to their deposits.
2) SNB can do whatever they want. They just lied, that’s all. This makes them untrustworthy for future announcements. Particularly ones where they say they will defend their policy with ‘upmost determination’
Jon,
Fair point on FXCM, that was deceptive.
As for SNB lying, it was lie or face bigger losses, so I don’t blame them for that. What I do think they should never have done was impose the EUR/CHF floor in the first place. Jordan inherited the problem I guess. Alternatively I don’t see why they couldn’t have just gone to minus 5% interest rates, or “however far minus is enough”, if they wanted to push the franc down.
Jon,
Fair point on FXCM, that was deceptive.
As for SNB lying, it was lie or face bigger losses, so I don’t blame them for that. What I do think they should never have done was impose the EUR/CHF floor in the first place. Jordan inherited the problem I guess. Alternatively I don’t see why they couldn’t have just gone to minus 5% interest rates, or “however far minus is enough”, if they wanted to push the franc down.
i think you are spot on. IG for example does not execute your stop order when the market goes through it. they aggregate your stops with everyone else’s and then work them all manually. the problem in this instance was it took 10-15 minutes to aggregate hundreds of stop orders, and by the time they started hedging the market had already collapsed. Of course they would have a problem finding liquidity – everyone in the market had already traded! Surely you cannot think retail clients, who had specific deposits and stop losses in mind, should be told they have to… Read more »
i think you are spot on. IG for example does not execute your stop order when the market goes through it. they aggregate your stops with everyone else’s and then work them all manually. the problem in this instance was it took 10-15 minutes to aggregate hundreds of stop orders, and by the time they started hedging the market had already collapsed. Of course they would have a problem finding liquidity – everyone in the market had already traded! Surely you cannot think retail clients, who had specific deposits and stop losses in mind, should be told they have to… Read more »
IG users who got massacred please come to
IGEURCHFLOSS@yahoo.com
IG users who got massacred please come to
IGEURCHFLOSS@yahoo.com
For those who suffered a loss on EUR/CHF due to an unfair “trading adjustment” by CMC Markets, we are many and uniting to escalate this issue to the financial services regulators in different countries.
We have strong evidence that the adjustment was unfair, and CMC Markets advertisement of “100% fully automated trading and no re-quotes” is misleading.
Join us at:
http://cmcmarkets-unfair-adjustment.my-free.website/
For those who suffered a loss on EUR/CHF due to an unfair “trading adjustment” by CMC Markets, we are many and uniting to escalate this issue to the financial services regulators in different countries.
We have strong evidence that the adjustment was unfair, and CMC Markets advertisement of “100% fully automated trading and no re-quotes” is misleading.
Join us at:
http://cmcmarkets-unfair-adjustment.my-free.website/